Competition Policy should try to prevent firms undertaking practises, which adversely affect competition. Practises such as operation of resale price mechanism (RPM), restrictive price agreements by groups of firms (cartels) and ‘full line forcing’ by a single firm (where consumers are faced with a choice between taking an entire product range or nothing at all).
Austrian economists argue that policy should concentrate on removing obstacles to competition to allow the development of new products and processes and easy entry by rival firms. They believe that those barriers imposed by the government are the most effective block to the operation of the competition. Typical measures would be the elimination of import controls and the removal of licensing or statutory restrictions on entry into markets.
However, the Chicago School believe that it is possible for monopolists with costs lower than the competitive reference. Demstez’s ‘efficiency hypothesis’ (1973, 1974 b) dismisses competition policy as unnecessary, for he believes that efficiency prevails regardless of market structure. He states that if some firms have a cost advantage over rivals, then market concentration will increase, since efficient firms will grow over time at the expense of others. Access to superior technology unavailable to firms operating in a competitive environment, may result in monopolists having lower costs.
Monopolist in a protected market (restricted entry and exit to the market) might not feel the need for efficiency. Left to a free market, the largest firm will always be able to dominate the market, as size confers a natural cost advantage over smaller firms-hence lead to monopoly. This is a primary reason, why monopolies are looked upon as ‘bad’ for the economy and society in general and Competition Policies have to be formulated.
An oligopoly market is the more common manifestation of imperfect competition in real life. In it, there exists few dominant firms and its profit depends on not just its own actions, but also of rival firms. Common examples of oligopolistic market are UK brewery market, US car markets and the world telecommunications market, where the possible responses of rival firms are considered while fixing price. There is no guarantee that the level of output and its price will be at the competitive levels. Firms may ‘collude’ and agree on prices or determine individually but, the fewer the number of firms in the industry, the higher the price tends to be.
However, there is no guarantee that the introduction of more firms in a market will make the market competitive. The new entrants might choose to collude if they can increase their joint profit.
A firm wishing to grow within an oligopoly market finds acquisition of a rival firm as a plausible way forward. For firms seeking geographical expansion, mergers and acquisitions seem compelling for a firm wishing to expand in a new market, a merger or takeover of an already established firm in the desired market/economy is attractive. E.g., when China opened her economy to foreign firms, a number of western firms established joint ventures and alliances with Chinese firms, which in turn gave them an insight into local bureaucratic procedures and provided local knowledge about consumer needs and market conditions.
When further expansion is limited in a particular market, a firm wishing to expand further, has to diversify and move into new markets. In this situation, mergers and acquisitions become more important since the firm can buy in the expertise and knowledge about the new product, rather than learn by doing.
We cannot assume that a concentrated market is necessarily a non-competitive market. Large firms may face competition from other large firms to the extent of being unable exploit market power and impose welfare costs on society. A degree of monopoly power is not necessarily bad, as it provides incentive for research and development.
Monopolies may not always arise from mergers or cost conditions but simply as the result of successful product or process innovation. If a firm introduces a new product, its success or failure depends on the consumer response. If sufficient consumers are willing to pay the asked price, the product stays. A firm that correctly assesses the market will prosper and might gain a monopoly position until others are able to enter.
According to Swiss economists, increase in merger activity is due to rapid pace of technological innovation. The faster product and production processes become obsolete; the often they are replaced through capital investments. A single enterprise may neither have the financial ability nor be able to achieve economies of scale, corresponding to these capital investments. Research and Development (R&D) is expensive and might prove profitable for the firms to share the knowledge with others in the form of Joint Venture.
Mergers are viewed harmful to the health of the economy, but sometimes, it has its advantages:
- International mergers serve as a means of introducing vigorous new competition, particularly where the company acquired is a small ‘foothold’ company.
- Mergers, which involve entry into concentrated domestic markets, can be efficiency enhancing and multinational enterprises possessing superior technology and financial strengths are often in a position to overcome entry barriers far easily than domestic firms.
For instance, an export joint venture enables firms otherwise unwilling or unable to face the cost and extra risk of exporting alone, to enter into new markets with subsequent beneficial effects on a country’s export performance.
Socially, joint participation ventures acts as a vehicle for the transfer of technology from developed to developing countries in a form that is more acceptable than other means of such technology, such as licensing agreements, which may contain conditions too restrictive.
A takeover (or acquisition) occurs when the management of a firm makes a direct offer to the shareholders of another firm and acquires a controlling interest. Usually, the price offered is substantially higher than the current share price on the stock market-hence, an acquisition involves direct transaction between the management of the acquiring firm and the stockholders of acquired firm. Additional funds are required for acquisition and the identity of the acquired firm is often subsumed within that of the buyer.
Competition Policy in practise
Governments in most advanced economies have been persuaded by the merits of a rigorous and comprehensive competition policy. Italy, once the notable exception, introduced legislation establishing competition policy in 1990. Governments have tended to adopt elements of both SCP and the Austrian approach, although the emphasis has varied. In the European Union, the Commission of the European Communities favours the Austrian economists’ approach and states its objective as promoting market competitiveness and structural readjustment through the elimination of factors reducing competition.
The Commission has jurisdiction to intervene only in matters, which affect competition between member states, and has no power regarding intra state competition.
Moreover, competition policy has had a major role in establishing the single European market by eliminating practises, which distort competition across the frontiers of member states.
The United States of America has a long established a comprehensive competition (anti trust) policy which is enforced by the Federal Trade Commission and the Department of Justice. The main legislation that established this policy is contained in the Sherman Act, 1890, the Clayton Act 1914, the Federal Trade Commission Act 1914 and the Robinson- Patman Act 1936. Competition policy as operated in the USA until the 1980s was largely consistent with the SCP approach. In recent years, there has been greater tendency to accept the idea of the Chicago School and recognise that monopoly may have redeeming features.
In the United Kingdom, competition policy dates from the Monopolies and Restrictive Practices (Inquiry and Control) Act, 1948, followed by the establishment of the Restrictive Practises Court in 1956. Monopoly policy has been revised since then in 1973 (Fair Trading Act) which established an Office of Fair Trading (OFT) within the government, headed by a Director General of Fair Trading (DGFT)) and in 1980 (Competition Act). Competition Act of 1998, replaced Restrictive Prices Act, 1976 and Resale Price Act 1976 and most of Competition Act 1980. The Competition Commission (CC) replaced the Monopoly and Merger Commission (MMC) in April 1999.
The OFT undertakes the scrutiny of competition within markets and advises the Secretary of State of the Department of Trade and Industry (DTI) on possible referrals to the CC. A firm has monopoly, if an individual firm is supplying 25% or more of the market share or the merger involves gross worldwide assets exceeding £ 70 million in value and can be referred to the Competition Commission.
The Competition Commission is divided into 2 parts: a reporting side, which is concerned, with traditional inquiries into scale and complex monopolies and mergers and takeovers and the Appeals Tribunals that will hear appeals against the decisions of the DGFT including the penalties he levies following his investigations. Penalties levied for infringement are up to 10% of UK turnover of the concerned firm.
UK competition policy is now aligned with the EU competition policy on restrictive practices and monopolies. The approach to competition policy in the UK has always been pragmatic, not leaning in any direction of any particular theoretical approach
Competition Acts reduce firms’ incentive to collude as the probability of detection increases, now that the CC has the right to enter premises and seize information and also the scheme to provide concessions to firms which are first to provide information of the existence of a cartel and its activities. This types of policy of the OFT has been successful in flushing out secret cartels in the US.
In the quest for efficiency, innovations, inventions and quality control, Competition Policy is an imperative.
